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February 22, 2012

Eurozone Data Drive Markets Down

PMI shows unexpected retreat in February, casts gloom on shares

For the second day in a row European stock prices retreated as economic data showed unexpected weakness for February, with services and manufacturing output falling.

Despite the fact that, according to Markit Economics, February figures were “the second-highest of the past six months, and [suggest] that the eurozone economy has stabilized over the first two months of the year having contracted in the final quarter of 2011,” a contraction that drove Markit's Eurozone Services Purchasing Managers' Index below January's 50.4 rattled investors.

Reuters reported that the contraction was lower than any forecast by respondents to one of its polls. Bloomberg, too, said that the median estimates by economists in its own poll had been for a PMI of 50.5. And in a separate report, declining factory orders in Germany led to a surprise February slowdown in expansion of services and manufacturing.

Still, Markit pointed out that January's expansion was “the first month in which the Index had risen above the 50.0 no-change level since last August.”

Manish Singh, the London-based head of investment at Crossbridge Capital, was quoted saying, “Given that Europe is still shrouded by the cloud of recession, a weak PMI—though not rain on the parade–will surely damp investor sentiment. In particular, weak numbers from Germany indicate weak European demand and a weak growth prospect for the eurozone as a whole.”

Stocks in Europe have been rallying, hitting a recent seven-month high, although reaction to the approval of a second bailout package for Greece has brought at best mixed results. Banks have had the poorest showing, thanks to their exposure to Greek bonds–which will undergo a large write-down in value as part of the rescue agreement.

There is no firm assurance that the rescue will avert a debt meltdown, either. Bank of England Deputy Gov. Charlie Bean was quoted saying in a Glasgow speech late Tuesday that although the deal “is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future.”